March 20, 2014 / 9:02 AM / in 4 years

Japan ready to roll out more stimulus to cushion sales tax hike

TOKYO (Reuters) - Japan stands ready to unleash further monetary and fiscal stimulus as needed to support the economy if the impact of a coming sales tax hike proves worse than expected, a senior government official said on Thursday.

Japan’s economy is on a firm footing due to brisk domestic demand but the government will closely monitor developments after the April 1 sales tax rise, Deputy Chief Cabinet Secretary Katsunobu Kato told Reuters in an interview.

The remark, by a close aide to Prime Minister Shinzo Abe, comes as investor expectations are rife that the BOJ will top up its unprecedented asset-buying later this year in a bid to hit its 2 percent inflation target.

Some analysts also expect the government to resort to more fiscal stimulus as early as summer to cushion the economy from the impact of the sales tax rise.

“We would take necessary steps. Each policy step would work its effects on the economy with a lag, so we’d need to mix them as appropriate depending on the situation at the time,” Kato said.

For now, Kato sees no need for more stimulus as the economy is expected to weather the tax hike, helped by 5.5 trillion yen ($54.16 billion) in extra spending during the current fiscal year and a record 96 trillion yen budget for the year that begins on April 1.

But Kato flagged external factors such as Ukraine and Chinese economy as risks to Japan, underscoring policymakers’ concern over sluggish exports.

Policymakers and private-sector analysts expect the economy to dip in the April-June quarter before rebounding in July-September. Kato suggested any deeper slump in the second quarter or weak recovery might warrant additional stimulus.

The BOJ last week stuck to its pledge of increasing base money, its key monetary policy gauge, at an annual pace of 60-70 trillion yen, with the aim of hitting the 2 percent inflation target around early 2015.

In a Reuters poll on Wednesday, seven of 16 economists saw the BOJ easing in July, three forecast April 30, two bet on October 31 and two anticipated no BOJ easing this year.

Asked about expectations for further monetary easing, Kato repeated the government’s mantra that it’s up to the BOJ to decide.

“Governor (Haruhiko) Kuroda has said he will not hesitate to implement policy as needed to achieve the price target... we trust his efforts,” Kato said. “It’s important to communicate with markets. I believe that the governor will make decision as appropriate while grasping the situation.”

(This story was refiled to remove extraneous paragraph)

Editing by Dominic Lau and Richard Borsuk

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